Banking and Monetary Policy in the Baltic
PERHAPS one of the most important effects of the world crisis was that it compelled each country to choose between two fundamentally different economic policies. On the one hand there was the policy followed in Great Britain, which was, very roughly, to stimulate the economic system by depreciating the currency, but to curtail as far as possible the further intervention of the State in commerce and industry. On the other, there was the principle evolved by Germany, namely, at all costs to preserve the nominal integrity of the currency while attempting to produce recovery by establishing a system of economic self-sufficiency. This inevitably led to the constant interference of the State in every walk of economic life.
For the Baltic States—Estonia, Finland, Latvia, Lithuania, and Poland—the choice was peculiarly difficult. Their larger neighbours, Germany and Russia, both adopted the totalitarian system. On the other hand, the Scandinavian countries, whose decisions inevitably influence those of the Baltic States, had unanimously chosen the policy of the sterling bloc. But not only was there a conflict between the examples of their nearest neighbours ; there was also a conflict of interests, since the closest commercial and financial ties bound the Baltic States both to Germany and Great Britain. For example, of the total trade of these five countries (imports and exports) in 1936, viz., about £175,000,000, rather more than £5o,000,000 was with Great Britain, and just under £30,000,000 with Germany. Now there is in general a rough resemblance between the economic structures of zach of these countries. They all depend primarily upon their exports of agricultural goods, such as flax, sugar or bacon, and dairy produce, such as butter, or timber in one form or another. Except for Poland, manufacturing industry is a recent development, and, except also for Poland, there are few mineral deposits of international importance, though Finland's iron ore and the shale of Estonia may prove to be so at some future date. Further, all five are countries of small peasant farmers, and all suffer, or suffered in 1931, from a great lack of capital. Lastly, all had experienced some form of currency depreciation shortly after the War, which discouraged them from further monetary experiments. It may therefore seem strange, in view of these circum- stances, that the policy they chose was in each case different. For this reason it may be of interest to examine briefly developments in the Baltic States during the last few years, as they shed a significant light on economic policy in general and on banking and monetary technique in particular.
The first of these countries to decide on its monetary policy during the crisis of 1931 was Finland, which abandoned the gold standard a few days after Great Britain. The currency was allowed to go to a slight discount over sterling, and the effect on the whole Finnish economy was rapid and substantial. By the early part of 1932 it was possible to abolish the exchange restrictions introduced as a precau- tionary measure after the gold standard was abandoned, and within a few months a recovery set in which soon gave place to a period of prosperity almost without precedent. Exports, which had fallen in value to the low level of 4,456,000,000 Finnish marks in 1931, have gradually risen to 7,223,000,000 in 1936, and imports from 3,456,000,000 Fink. to 6,368,000,000. During the first eight months of this year the rise has been even greater ; the value of exports has been 5,612,000,000 Fmk., and that of imports 5,842,00o,00o Fmk., and the volume of exports last year was larger than in any year since the War. This recovery has been accompanied by a remarkable increase in the gold and foreign exchange holdings of the National Bank, which amounted to 2,652,000,000 Fmk. at the middle of September last, as against only 891,000,000 at the end of 1931. This in turn has enabled the country entirely to wipe off its short- term international indebtedness, and even in some cases to finance its own foreign trade with its surplus balances of exchange. Meanwhile, unemployment has been practically eliminated, budgets have been balanced, and the State's floating debt has been greatly reduced. Prosperity has now reached a stage where, as in Sweden, the authorities have begun to consider steps to avoid an inflation of credit.
From 1931 to 1933 Estonia made an unhappy and unsuc- cessful attempt to hold the currency at its theoretical value by means of exchange restrictions, with the usual deflationary results. This experiment was abandoned in June, 1933, when Estonia left the gold standard and became a member of the sterling bloc. Estonia has little cause to regret this change of policy. There was almost immediately a remarkable improvement in foreign trade, exports increasing from 43,000,000 krone in 1932 to 83,000,000 in 1936, and imports from 37,000,000 to 87,000,000. The heavy export surpluses of the years 1933-1935 had a beneficial effect on the gold and exchange holdings of the Eesti Pank, the bank of issue, which have risen from 20,000,000 krone at the end of 1932 to about 51,000,000 at present. As in Finland, unemploy- ment is now almost non-existent, deposits with the commercial banks have risen by nearly 90 per cent. since the years of acute crisis, and the budget has been balanced. It is note- worthy, also, that the Estonian 7 per cent. Loan of 1927 is the only League Loan on which service is still being paid in accordance with the terms of the original contract. Yet, though the prosperity of the last few years was largely due to the decision to join the sterling bloc, totalitarian experi- ments have not been altogether eschewed, as the inevitable result of the totalitarian coup d'etat of 1934. These experi- ments have created many problems. For example, the decision to industrialise the country, though it has absorbed most of the unemployed, is expensive, and has led to the appearance, for the first time since the crisis, of an import surplus last year, which will probably be exceeded in 1937. There are, however, indications that the authorities are aware of the potential dangers of such a situation.
At the onset of the crisis Latvia set her face against the sterling bloc. Exchange restrictions were introduced in 1931, and were progressively tightened in the effort to maintain the nominal value of the currency. This effort was unsuccessful, both in the narrow sense that the regulations brought into being a black bourse on which the currency was quoted at a discount and, what was more important, in the wider sense that recovery continued to elude Latvia far longer than Estonia. Moreover, the existence of the restrictions inevitably led to the gradual encroachment of the State upon practically every section of economic life, including foreign trade, industry, insurance, and banking. This tendency increased greatly with the advent of a totali- tarian regime in 1934, so that the Government is now in a position where it can, directly or indirectly, exercise control over almost every branch of economic activity. However, the growing prosperity of Latvia's best customer, Great Britain, led to a slow recovery, and exports increased from the low level of 1933-81,000,000 lats—to 99,000,000 in 1935 ; imports also increased from 91,000,000 to 101,000,000. Finally, the devaluation of the gold bloc currencies in September, 1936, gave the Latvian Government the oppor- tunity of changing its policy without losing face ; the gold standard was abandoned, and Latvia joined the sterling bloc. The numerous restrictions which still hamper the free play of cconomic forces have been unable to prevent a measure of recovery even in the short period which has since elapsed.
CONDITIONS IN LITHUANIA.
Unlike Estonia and Latvia, Lithuania has no manufacturing industries of any importance, being a country of small peasant farmers who themselves produce most of their own require- ments. Moreover, the standard of living is considerably lower than in the other two countries, and in Lithuania the farmer could consequently accept a lower price for his exports of bacon and butter than in Est cnia or Latvia. In this he had the assistance of a highly developed co-operative marketing organisation. On economic grounds, therefore, there was no urgency, such as there had been in Estonia and Latvia, which compelled Lithuania to devalue or depreciate her currency. As the result, the index of wholesale prices (1929 = Ioo) was allowed to fall to 47.4 in 1935, and the value of exports declined steadily from 334,000,000 lits in 1930 to 247,000,000 in 2934 ; but the volume, after falling to 331,000 tons in 1932 actually rose to 525,00o tons in 2934. Meanwhile, since the export of capital could be controlled by unofficial measures, there was no need for exchange restrictions. The dispute with Germany over the Memel question in 1935, however, was the cause of much uneasiness, and restrictions had eventually to be imposed in October of that year. Yet, in spite of this, there has been some recovery since 1935, partly as the result of the settlement of the Memel dispute in August, 1936. The value of exports has risen from 152,000,000 lits to 290,000,000 in 1936, when the volume was almost at the level of the pre-crisis years. During the first eight months of 1937 this level was main- tained. Moreover, there has been a noteworthy increase in the gold and foreign exchange reserves of the Central Bank, which now amount to about 83,000,000 lits, as compared with 49,000,000 at the beginning of October, 1935.
Poland, by far the most important of the Baltic countries, had experienced two currency collapses shortly after the War. It was, therefore, not surprising that she chose to adhere to the gold bloc, at first without imposing exchange restrictions, rather than to attempt monetary experiments. This decision, however, involved deflation of a drastic nature, leading to a continuous fall of prices and a steady decrease of foreign trade. Moreover, although the Bank of Poland's exchange reserves were sufficient to cover ordinary movements in the current balance of payments, they were inadequate to meet withdrawals of capital such as all the gold bloc countries have had to face, though with considerably greater gold stocks than those of Poland. Consequently, Poland was forced in the end to introduce exchange restrictions in April, 1936. The position was further relieved by the reduction during 1936 of the service on loans contracted abroad except in countries, such as Great Britain, with which Poland had a favourable balance of trade. However, as the result of an undertaking given to the American holders of Polish loans not to accord more favourable treatment to other foreign holders, Poland has now announced her intention of defaulting on the British tranche of the 7 per cent. Stabilisation Loan also, notwithstanding the fact that her favourable balance of trade with Great Britain has been maintained.
An opportunity for abandoning the attempt to maintain the theoretical value of the currency was provided by the devaluation of the gold bloc countries in September, 1936. This chance was rejected. But, except for her monetary policy, Poland has so far hesitated to embrace the totalitarian economic system. Perhaps as the result, she has experienced a noteworthy recovery during the past year. In the first seven months of 1937 foreign trade has been considerably greater than in the past few years. A large increase in imports may partly be due to the credit of 2.6 milliard francs obtained from France after the rapprochement of last autumn, a portion of this being allocated to the purchase of materials for the Polish defences, but there has also been a steady increase in the Bank Polski's gold and foreign exchange.
Meanwhile, the budgetary position has improved somewhat since the worst years of the crisis, in spite of heavy expenditure on armaments, and industrial production has increased ; the general index (1929 = too) stood at 84.2 at the end of June as compared with 71.9 at the end of June, 1936. Among the most important objects now being undertaken may, be mentioned the creation of an industrial district at Sandomierz, in Central Poland, with the purpose of relieving the concentration of industry on the German frontier. However, the rise of prices, which has greatly assisted the farmer, has somewhat hindered this programme of industrial development, and many of the existing cartels have had to be dissolved. Thus Poland's attempt to get the best of both worlds by maintaining her currency at the old level through restrictions but refusing elsewhere to adopt the totalitarian technique has not been an unqualified success. It is true that Poland has obtained some immediate advantage from the exchange restrictions. They have, however, post- poned, not solved, her real difficulties, for Poland has still to face the fundamental question whether she will accept or reject the principle of the closed economy.